Ghost Bites (Calgro M3 | Labat | Mpact vs. Caxton | Murray & Roberts)

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Calgro M3 is lining up a huge pipeline

Investors will keep a close eye on the balance sheet

Residential property developer and memorial park operator Calgro M3 has released results for the six months ended August. It looks like good news, with HEPS up a meaty 33% to 57 cents. This was driven by 5% growth in revenue and an improvement in gross margin from 19.7% to 22%.

Although interest bearing borrowings have decreased by 3%, no dividend has been declared for this period. This seems to be because of general pressures on the balance sheet and the extensive development pipeline. Cash needs to be retained here.

Looking deeper, the residential property development business had 3,868 opportunities under construction as at the end of August. Around half of these are expected to be completed or handed over before February 2023, so revenue is expected to increase in the second half of the financial year. That would be a big finish to the year, as there were only 1,193 opportunities completed in the first half of the year.

The full pipeline in that segment is 24,000 opportunities for R15.9 billion, excluding the Frankenwald development. Calgro plans to exercise the Frankenwald land option at the end of June 2023 and is confident that internally generated cash can fund that option. This would unlock an additional 20,000 residential units across eight distinct income groups.

In the first six months, R47 million of annually planned infrastructure was self-funded. A further R73 million is coming in the second half of the year, which the company plans to fund internally. This is despite the first half of the year registering negative cash from operations due to infrastructure development and other factors.

In the Memorial Parks business, the goal is to grow cash receipts to support all group overheads and interest obligations. In this period though, sales slowed due to various factors including lower burial volumes, affordability constraints and the restructuring of the sales and marketing department. When adjusting for excess Covid-related debts, the memorial parks business is 5.6% lower than the comparable period.

To find out more about Calgro M3 and to ask questions like a proper sell-side analyst, join us on Thursday 20 October at midday on Unlock the Stock. You can also enjoy a presentation by Pan African Resources on the day. Register here for free>>>

Labat needs capital as cash is running low

And sometimes, clarity can be obtained between 10:27am and 11:25am

If there’s one thing that irritates me on the market, it’s when companies treat shareholders like a joke.

The JSE rules are clear. A listed company must publish a trading statement when a “reasonable degree of certainty” exists that results will differ by at least 20%.

At 10:27am, Labat released a trading statement for the nine month period ended 31 May.

Not even an hour later, the detailed results were released. It’s impressive to move from a “reasonable degree of certainty” to “certainty” in less than an hour. Perhaps those cannabis products really do help you focus.

The headline loss per share of 6.6 cents is already worse than 6.5 cents for the 12 month period ended August 2021, as there was significant “other income” last year that hasn’t repeated this year.

The company is looking for capital, which makes sense when you look at the balance sheet. This is a highly speculative play, with a loss of R34.7 million and the largest current asset being a receivable from SARS. I’m quite happy to keep my money away from this one as the risks seem to be as high as the customers.

Mpact responds to Caxton

It’s time for the latest salvo from the green corner of the ring

Of everything I’ve read thus far in the Mpact vs. Caxton fight, this is my favourite line thus far:

“Shareholders should note, however, that as SENS is not a forum for argument, Mpact does not intend to respond to every statement or allegation made in the Caxton Announcement and will confine itself to the matters of relevance to Mpact shareholders.”

Mpact SENS announcement, 17 October 2022

In this announcement, Mpact has reiterated / clarified its position on several matters:

• The investigation by the Competition Commission started in 2016 and the Commission is not seeking to impose a penalty against Mpact. The company notes that this matter is not linked to the merger dispute with Caxton and calls Caxton’s references to this investigation “opportunistic and unwarranted”
• The Mpact board cannot assess the merits of an offer from Caxton because there is no offer as of yet, so Mpact equally cannot support a joint or separate merger filing.
• The Tribunal has referred the matter back to the Commission to determine if Caxton should be allowed to file a merger notification. Notably, the Tribunal commented on the lack of details around a potential offer and noted that firms cannot approach the regulator for a “blank cheque of competition approval” on “terms that are non-existent” – I fully agree with that!
• In respect of the potential “customer flight” of Golden Era, Mpact confirms that Golden Era confidentially registered its opposition to Caxton’s proposed acquisition on the basis that Golden Era is a major competitor of Caxton and is worried about its supply from Mpact if control changes. Mpact derived less than 10% of total revenue from Golden era in 2021. The Mpact board considers it unlikely that Golden Era will be lost as a client, as supply in the market is tight at the moment and Caxton hasn’t even made an offer. On that basis, the board believes it would be irresponsible to announce the potential risk.

There are various other points in the announcement. If you want to read the entire fight, then refer to the full text on SENS.

Ultimately, there’s an underlying principle here that I fully agree with. Until Caxton actually makes a formal offer for the Mpact board to consider, this is all just noise over SENS and allegations flying in every direction. It would clearly be difficult or impossible for the current board to work with Caxton, so this would be anything but a harmonious relationship in the event of a formal offer being made.

The market will now await the next move, presumably from Caxton.

Disaster at Murray & Roberts

If you aren’t a MUR shareholder, then put a smile on your dial – life could be worse

If you are looking for an investment that you can buy and forget, then please don’t invest in cyclical stocks. Here’s another example from Murray & Roberts of why the only thing you’ll want to forget in that scenario is your share price return:

It’s not often that you see a major company shed a third of its market cap in a single day, yet here we are. Murray & Roberts is officially a loss-making entity thanks to supply chain disruptions and delays in projects which have eroded margins.

Construction is perhaps the toughest industry of all, which is why I’ve never invested in this sector. It’s a serious guessing game. If there are delays to fixed price contracts, then the costs rack up and the revenues don’t.

Here’s the really ugly news: for the six months ending December 2022, the group expects earnings to be at least 100% lower than the previous period which means the company is officially loss-making (again).

To make it worse, there are “especially acute” working capital requirements in the Energy, Resources & Infrastructure platform. That’s a private school way of saying that the place is deep in the smelly stuff.

This is another painful example of why I believe in highly diversified portfolios. You may think you’re investing in great businesses that tick all the fundamental boxes around infrastructure development etc. and you can still be sitting with a 34% drawdown in the time it took you to have your breakfast. When it happens to 3% of your portfolio, it’s painful. When you have 20% in a company and this happens, it’s catastrophic.

Size your positions carefully!

Little Bites

• A director of AVI has sold all the shares received under a bonus share plan (vs. the usual situation which is to sell enough shares to cover the tax).

• A non-executive director of Transcend Residential Property Fund has accepted the offer from Emira Property Fund to the value of R457k.

• Southern Palladium has given an update on its Phase 1 drilling programme at the Bengwenyama PGM project. As is always the case in junior mining, the SENS announcement is a crash course in geology. Five drill rigs are drilling and the first samples have been dispatched for assessment. This means that further updates are expected in coming weeks.

• I find it interesting that Shoprite is publicly inviting stakeholders to engagement sessions ahead of the AGM, particularly regarding the non-binding advisory resolutions relating to remuneration policy. A feature of the local corporate landscape is that many remuneration policies are being voted down by shareholders. These engagement sessions are designed to identify issues ahead of time and avoid the non-binding resolution being a negative outcome.

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